Impact Investing is Not Microfinance

I was at dinner last night with a friend who is thirty years into an illustrious career as a bond trader. Chatting over a lovely 2008 Bordeaux, he asked about my interest in social finance. My various explanations ("y’know, ‘doing well by doing good’") seemed to click: “Ah, yah, like microfinance?"

Well, no, not really… I am of the camp that microfinance hasn’t proven to be a game changer, at times even worsening borrowers’ economic situations. I started to explain some of these now-common criticisms: for example, that micro loans further impoverish clients or fund household purchases rather than sustainable income sources. (See Background below for further reading.)

On the other hand, I suggested, imagine if a bank - or angel investor! - made a single loan of $10,000 to a local restauranteur to replicate his successful restaurant in two other spots. He would hire waitstaff, buy local produce, contract designers and construction workers, and decorate the new restaurants. All of a sudden, that $10,000 has borne revenue streams - some one-time jobs but also many ongoing salaries - for at least a dozen people.

This example clearly resonated with my friend, a savvy businessman and financier. His a-ha moment got me excited. I decided to dedicate myself to getting this word out to other folks like him. By elucidating the opportunities (and real challenges) of early stage angel investing in low-income and/or remote communities, I hope to connect worthy entrepreneurs with the finance they need to promote economic well-being for themselves and their neighbors.

Not that there are infinite restauranteurs in low-income cities around the world who lack only cash to become business moguls, but there are enough of them - and peers down the street working in other industries - to absorb far more risk capital from would-be impact investors than is flowing currently. Further, this approach recognizes - in a way that microfinance doesn’t - that not everyone is an entrepreneur. It differentiates between business owners and employees, providing larger chunks of capital to those willing and able to take on the risk of entrepreneurship, who in turn provide work to those looking for a more stable income.

This mundane example is just one way that I would like to see impact investment dollars make life better in poor communities near and far. Watch this space for specific examples of such investments, insights about industries with great potential to attract this capital, profiles on specific geographies with great opportunity, and descriptions of established financing tools being used to fund effective solutions for social problems.

Please share your thoughts and questions by email or Twitter - it’s a constantly evolving field, and we’ve learned that the ‘crowd’ (that’s all of us!) usually come up with the best answers…

BACKGROUND: Why isn’t microfinance a game changer?

1) micro loans might help an individual family (though someexperts say they can actually be harmful by increasing borrowers’ debt levels) by breaking their cycle of poverty, but don’t help the community collectively, beyond the household unit.